A Discussion on DAOs: Part 2
Originally published July 25th, 2022
Summary: DAOs were conceived without proper infrastructure and tooling in place that is necessary to empower their operations and to cultivate success. Things like voting, treasury management, and general Standard Operating Procedures were not implemented prior to their formation, which led to much confusion and eventual abandonment. Lack of standards and the failure to gather KPIs and other metrics by the Harmony Foundation has caused uncontrolled spending without the collection of valuable data. Leadership and the community must decide if decentralized leadership is necessary to running a successful business and implement standard that produce measurable metrics that will aid in future decision making.
The purpose of this article is to determine the impact of DAOs on Harmony and to discuss the manner in which they were bootstrapped. By examining the brief history of DAOs on Harmony, I seek to build a standard for measuring DAO performance and to discuss whether or not the Harmony Foundation should continue to invest in DAOs. Additionally, we should consider the following questions:
-Does Harmony core leadership want the chain to be decentralized?
-Can DAO(s) run the Harmony Foundation? Do we want to copy Maker?
-Can DAOs be sustainable?
-Should DAO voting/ membership be exclusive or tokenized?
Also…
-Can Harmony DAOs embrace Real World Assets (RWAs) and bridge the gap between blockchain and off-chain entities?
What is a DAO on Harmony?
A member managed entity lead by three mandates, which elects Governors who (a) Facilitate voting for the members of the DAO, (b) Managing the Voting process, (c) Signing the Multi-sig wallet when an approved vote has funding attached. These officials do not have the power to act or decision-make without the majority vote.
Importantly, members of the DAO are in charge of creating proposals and building awareness through marketing, being active, voting, and implementation. This includes the responsibility to become financially self-sustaining over time. Initially, DAOs were offered funding as a means to “drive decentralized governance and growth of Harmony’s network, product, marketing, and more”.
What is a Governor?
A governor has no power spare their duty to setup snapshot votes and to provide their signature on the DAO treasury multi-sig wallet. For serving their (3-month term) they are compensated in a suitable amount for their approved logged hours. Additionally, they are not excluded from any paid engagements or contracts beyond this duty, due to their equality with other DAO members.
DAOs began on Harmony Spring of 2021, starting with the Validator DAO (VDAO) and the Community DAO (CDAO), which were the first Core DAOs. They were tasked with growing the network and onboarding new users while also engaging with current ones and they were given access to initial rounds of funding (albeit delayed) outlined here. Additionally, they were supposed to be allotted funding through staking rewards (VDAO) and revenues generated from the crazy.one domains NFTs/ Harmony Name Service (CDAO). The major goal was for the DAOs to improve upon execution time for product launches, community marketing, grant/ resource allocation, and other on chain events by identifying issues through a decentralized approach that would reduce the range of issues the Harmony Foundation must handle.
Since the DAOs were a brand new concept to Harmony, they were first comprised of an Initial Council, which was voted into office by the community (or validator community) and tasked with “establishing the basic operational parameters of the DAO” in the form of a VDAO/ CDAO charter. These duties would include: forming the mandates, establishing guidelines for the use of DAO funds, determining how elections would be held, defining governor responsibilities, and outlining how proposals can be made. After these SOPs were created the initial council stepped down from their positions, to be replaced by a lasting council of elected governors.
While these charters were being drafted and brought to proposal, the need for adequate DAO tooling and infrastructure dapps became loudly apparent. In order to pass any proposals, the DAOs would need suitable voting methods, such as weighted voting via Snapshot. Unfortunately, in September 2021 the only Snapshot version available on Harmony was an outdated fork that lacked Quadratic voting (which is the current required method). Another major issue that affected the DAO’s ability to achieve self-sustainability was that the Harmony Gnosis variant did not include the ability to stake assets from the multi-sig treasury. By staking unused portions of the treasury the DAO would be able to earn passively and potentially even lend its assets for income generation. But since the Gnosis fork was incompatible with many other tools, this was not an option. Issues stemming from the lack of existing framework and the absence of clear expectations from the Harmony Foundation led to the first fractures that would become the absolute rift that now exists between DAOs and the Foundation.
In December 2021 those who had taken part in the initial DAO leadership took note of some issues that were already apparent and shared them with the community in a number of forum posts. One such document argued that “core level DAO’s such as VDAO, CDAO, and DEV DAO will struggle with participation because they did not stand up organically. There must be overt support for the DAO so non governors will participate initially while the framework is being built”. This is an important observation because it identifies a key issue in the relationship between the Harmony Foundation and the DAOs. Since the Core DAOs were conceived by the Foundation, they lack the organic member support that would otherwise be present if formed by a passionate community. Furthermore, this creates a dependency towards the parent in the form of funding, direction, and expectations.
As a means to combat this dependency, core team members from the Harmony Foundation could run for governor/ advisory positions in an attempt to interface between the two entities, thereby streamlining parent expectations and providing temporary oversight into proposals and funding. This would address a major issue of untimely responses from the current top-down, centralized leadership into the DAO. Ideally, core team members would be chosen by their expertise and help to manage/ advise only a DAO in which is strongly related to their skillsets and knowledge. Any new DAOs formed could mirror departments within The Foundation as a means to shift the responsibilities from that centralized body into the corresponding DAO.
At the very center of the issue lies the truth: the Harmony Foundation created and funded many DAOs, not just the Core DAOs, without proper setup and planning. They had a beautiful vision with honest intentions and a community that was eager to move forward with the DAOs. Unfortunately, they started building the walls before the foundation was set. Additionally, they retained centralized control over the decision-making process while creating only the idea of a DAO. This path has contributed to the Principal-Agent Dilemma, which is “a conflict in priorities between a person or group (the principal) and those making decisions and acting on their behalf (the agent)”. Instead, implementation of the DAO’s aim to align member interest through their shared stake in the network (ie: $ONE holders) would unite the decision-making members by their conjoined financial interests. Any act against the DAO by its members would effectively equate to self-sabotage.
DAOs are not the only way forward, they are a choice that was made by the Harmony Foundation in the past. They can be salvaged or scrapped. Valuable sources such as MIT “consider it a bad idea to trust the masses with important financial decisions”, backing that up with a comparison between venture capitalists (VCs) and DAO investment proposals. Many VCs are high income earning, educated, well-connected individuals that still manage to underperform the stock market year after year! They go on to argue that DAO members and leadership may be distributed across multiple legal jurisdictions, causing complicated legal proceedings in the case of any judiciary concerns. Considering these points, and that DAOs are a very new concept that is yet to be proven as a successful model for running a business, we should strongly weigh the options as an invested community. Last, you need participation in order to have successful DAOs, and so far, there has been very little involvement from the Harmony community.
So…Did DAOs fail?
It depends. I would say no, and that the problems were both systemic as well as brought on by poor management. This is not a simple question because:
(1) There are two types of major DAO categories: Core DAOs (Validator, Community, Developer, and arguably ZKU) as well as ancillary DAOs. Core DAOs aim to slowly take on the responsibilities of the (centralized) Harmony Foundation while also providing user support for the network. Ancillary DAOs have a broader range of reasons to form and operate.
(2) Milestones have so far been quite arbitrary and non-standardized; therefore, it is impossible to measure and assign value. I would recommend using standardized DAO frameworks (Aragon, Colony, DAOhaus), accounting (Gnosis), and governance (Snapshot) in order to create repeatable solutions and metrics. See here.
Each DAO has its own three-part mandate and funding milestone agreement with the Harmony Foundation, which I propose create their entity measure of value (EMV). Creating metrics like EMV allows us to establish measurable worth for discussing and ranking DAO performance, as well as providing insight into the kinds of milestones that we can set in order to produce the desired results (user onboarding, liquidity on-ramping, user engagement, etc). The EMV looks at what the DAO set out to do (mandates) and what the Harmony Foundation asks them to do (milestones) and establishes a numerical value to represent how much of the initial goals have been met. This is contrary to normal company valuation, which looks at cash flows, rate of growth, and risk.
ex: XYZ DAO said that they would:
(1) Growth: onboard 1,000 users, (2) Engage: host 10 events within 6-months, and (3) Build: create 5 smart contracts to automate DAO activities. Additionally, the Harmony Foundation requested the following milestones, each of which would correspond to a $10,000 payout:
-Launch 10,000 NFT Collection
-Gain 1,000 followers on Twitter
-Create 5/9 Multi-sig Treasury
-Bring 1,000 users to Harmony
-Translate open.harmony.one
Let’s say XYZ DAO completed 3/5 of their milestones and were funded $30,000. They also were able to complete 30% of their mandates total vision. We could establish an EMV score of XXX (sorry I am not a mathematician).
Organizations often require Key Performance Indicators (KPIs) in order to determine rate of growth and efficiency in a dollar-by-dollar format. It is an important aspect of marketing expenditures and is an appropriate way for the Foundation to manage the outgoing flow of assets into the DAOs (and grantees). Further, we can use the EMV score and other metrics, such as customer acquisition cost (CAC), in order to produce meaningful marketing data that encourages the Foundation to create impactful milestones that fit their vision. The data could then be analyzed to determine how much a certain milestone costs to achieve, albeit the DAOs execution of the outlined proposal must not be ignored. Some useful KPIs may include: remaining treasury balance (I recommend mandatory enrollment here), expected runway, number of members, past 30d new members, number of proposals made, number of votes cast/ proposal, and social media data.
In conclusion, this document is only the framework and beginning of a necessary discussion that we, as a community, can have with the Harmony Foundation in an informed manner. I question whether we need 10,000 DAOs. I wonder if a small group of specialized DAOs that are in alignment with the various departments of the Foundation can successfully run the chain in a decentralized fashion. Perhaps having a centralized entity to steer the ship is smart business-wise, and if so, how can the community have a say in who that leadership is?
DAOs and Such - Roles of Governors?
“The Way of Harmony DAOs”, Li Jiang. May 18, 2021. The Way of Harmony DAOs. This year, the Harmony Foundation is… | by Li Jiang | Harmony | Medium
https://medium.com/harmony-one/harmony-kickstarts-the-community-dao-73e50f57dfd0